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May 01, 2007

Indiana: Smile for the Camera...

As the dust clears on Indiana's 2007 legislative session, there's lingering controversy over the way Indiana lawmakers have chosen to provide local property tax cuts.

The mechanism-- a temporary one, in force for just the next two years-- is a tax refund. Sometime after Hoosiers pay their property taxes this year, they will receive a check in the mail with their share of a $300 million property tax cut. Accompanying the check will be a little note:

"A portion of your local property taxes due in 2007 are being refunded due to tax relief provided by the Indiana General Assembly. Your refund is in the amount of $_____."

Just in case homeowners might not get the message, the budget bill that authorizes the rebate also specifies just how big the bold print needs to be on the refund letter: "at least 12 point type."

There's a good reason for the bold print. If writing a big property tax check is a painful experience for Indianans, this bill won't make it any less so. When they receive a rebate later on, they'll be told what it is (and, of course, who to thank for it). But that's no substitute for simply not having to pay the property tax in the first place.

And, if the experience of other states is any guide, the rebate checks will count as taxable income when some Hoosiers file their federal income tax forms next year. (This will only be true for Indiana residents who itemize their deductions and write off their property taxes, and makes perfect sense: if your initial property tax bill is $2,000, and you later get a rebate for $200, your itemized deduction will probably be for the full $2,000-- so you need to count the $200 as taxable income next year just to keep the books in balance.)

There are more substantial reasons to be unhappy about this year's Indiana property tax refund, which I discuss here. But for the moment, it's enough to note that this appears to be a carefully tailored PR move.

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The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state - Adam Smith, An Inquiry Into The Nature and Causes of the Wealth of Nations, 1776